Observations on the market action and the implications of the gold and silver markets.

Saturday, December 02, 2006

The US Dollar Illusion

(click to enlarge)

The left hand chart is the Dow priced in US dollars. The right hand chart is the Dow divided by the price of gold. Most investors in the American stock markets do not understand inflation (increase in the supply of "money", tokens really) and what it does to the purchasing power of the dollar, their stock portfolios and their real estate. Therefor they do not understand that despite the nominal dollar recovery of their portfolio and the increase in the nominal dollar price of their real estate, they are still way under or behind in terms of the purchasing power of their stocks and real estate.

Because they do not understand the difference between supply inflation and price increases, they will turn to those that caused the problem (the combination of government and their central banks) to fix the problem when they are seriously economically and financially hurting.

There are 3 ways a government can get funds to operate.1. Taxation which has its limits.2. Borrowing funds which has its limits.3. Creating "money" (tokens) for free which has its theoretical limits, but those limits are really really far out there.

The worse the economy gets, the more the pressure on governments to create new fiat, which means creating new debt (increasing government expenses), to spend on stuff and payrolls to keep the masses calm. At the same time government expenses are increasing, their revenue is decreasing. A vicious circle, that the US is already in.

When Japan topped out and started its long decline, the world was not awash in Yen (wasn't the world's reserve currency, OPEC wasn't forced to demand Yen for oil), they had a high savings rate and huge savings, little debt, and a substantial trade surplus. Yet their national government felt compelled to go on a debt accumulation spree to enable a spending (construction) spree.

The US has topped out and is in the opposite position of Japan.

The US, prior to the start of its last great depression, had a small trade surplus.

Which way do you think prices of *necessary* stuff and services inside the US are going?

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"The state -- or, to make matters more concrete, the government -- consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can't get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting 'A' to satisfy 'B'. In other words, government is a broker in pillage, and every election is a sort of advanced auction on stolen goods." - H.L. Mencken